Alibaba (BABA -0.21%) stock has benefited from a huge relief rally in recent days. A preliminary agreement between the U.S. and China will allow U.S. auditors to investigate Chinese companies.
Such a deal dramatically reduces the odds that U.S. exchanges will delist Alibaba stock. But does that make the internet and direct marketing retail stock a worthwhile investment?
The nature of Alibaba stock
U.S. investors have faced significant challenges with Alibaba and other Chinese stocks. China bars U.S. investors from directly buying stock in a company. To circumvent this rule, investors turn to American depositary receipts (ADRs), certificates issued by banks that represent a specific number of shares of a foreign stock.
ADRs offer benefits to both parties. They allow U.S. investors to invest in companies not otherwise accessible to them. In addition, these foreign companies gain easier access to U.S. capital markets.
Alibaba and other Chinese stocks have faced a possible danger of delisting. China had not wanted to grant U.S. regulators the right to audit Chinese companies, allegedly on national security grounds.
This scenario stokes some fear as to what a delisting means for investors. While it would not wipe out Alibaba investors, it would likely switch the stock to the over-the-counter markets, a factor that would probably diminish interest in the company.
But assuming the agreement holds up, Alibaba can sidestep that potential issue. As a result, Alibaba's stock price rose as much as 20% on this news.
Why you may still want to avoid Alibaba
Still, U.S.-China relations remain tense on many levels. Visits by House Speaker Nancy Pelosi and other congressional figures to Taiwan have upset Chinese authorities. If such tensions continue to escalate, that could affect the agreement on ADRs and other aspects of the U.S.-China relationship.
The company also posted lackluster financials in the latest quarter. Second-quarter revenue of $31 billion registered no growth year over year. Its brightest spot on the revenue front was a 10% increase for Alibaba Cloud. But at $2.6 billion in revenue, it makes up only 9% of the company's revenue base.
Non-GAAP (adjusted) net income came in at $4.5 billion, a 30% decrease year over year. The company blamed falling adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and decreasing share results from equity method investees for the decline.
Despite this report, analysts believe Alibaba can deliver 4% annual revenue growth this year and 12% in 2023. Nonetheless, Alibaba has significantly underperformed the S&P 500. And while Alibaba has experienced less of a decline than Sea Limited over the last year, it has not exhibited the stock price stability of Amazon.
Moreover, the current price-to-sales (P/S) ratio is 2. That comes in well below Amazon's 2.8 sales multiple or Sea Limited's 3 P/S ratio.
But for the added expense, Amazon holds about $96 billion in liquidity, giving it one of the strongest balance sheets among public companies. Also, Amazon's projected yearly revenue growth of 11% in 2022 and 16% next year exceeds the forecasts for Alibaba.
And although investors buy Sea Limited shares using the same ADR system, the U.S. is a longtime ally of its home country of Singapore, a factor that will keep political risk in check. Analysts also expect Sea Limited to grow annual revenue by 23% this year and 25% in 2023, albeit while posting considerable losses.
Should I consider Alibaba?
Resolving the audit dispute between the U.S. and China takes considerable pressure off the Alibaba ADR. Nonetheless, U.S.-China relations have a history of changing without warning, a factor that could again endanger Alibaba.
Amid the stock market declines, investors can find other potentially lucrative long-term investments. Both Amazon and Sea Limited are well off their 52-week highs. And while their sales multiples are higher, both offer considerable growth potential without the added political risk. That factor probably makes those stocks safer choices despite the added expense.